Government Solution Providers Finally Hit By Sequestration, Study Says

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The sequestration issue that has rattled the markets and caused a wave of uncertainty across the country didn't have much of an effect on government solution providers, until now.

A study published Wednesday by Technology Business Research (TBR) said that, while IT saw modest revenue improvements in the first quarter of the calendar year, in the second quarter IT companies took a hit. Average weighted revenue for the second quarter saw a decline of 4.2 percent, down 80 basis points from the previous quarter.

The study reviewed 20 benchmark companies and concluded that the sequestration had "finally emerged as a chief threat to vendors' growth for the remainder of 2013."

[Related: Government Sequestration Has VARs Concerned (Video)

"Vendor sentiment after the sequester cuts were triggered in March was generally dismissive for the mandatory budget reductions and their impact on top-line growth, margin performance and cash generation," TBR Senior Analyst and Public Sector Practice Lead John Caucis said in a prepared statement. "However, data from 2Q13 shows that the pace of new awards in the federal IT services space is being impacted by continued budget uncertainty, and now the added caveat of sequestration."

The sequester came into play last February as a committee failed to find sufficient spending cuts before March 1 as part of 2011 debt ceiling negotiations, threatening to slash 10 percent across the board. No deal was reached, putting the sequester into effect, though spending was continued through the end of the year under a continuing appropriations act. The U.S. House of Representatives voted to continue appropriations through 2014, but at the time of publication the U.S. Senate had not followed suit.

"The continued uncertainty surrounding the budget is having a negative impact on our customers' ability to plan their spending, and their ability to prioritize the many important missions they must fulfill. This, in turn, is impacting the contracting community's ability to plan our investments to meet the customer's requirements," said Randy Belote, vice president of Strategic Communications at Northrop Grumman, one of the 20 companies surveyed for the TBR study, in a statement. Northrop Grumman reported an additional $100 million decline in its outlooks for 2013.

Mardi Norman, president and CEO of Dynamic Systems, an El Segundo, Calif.-based government integrator, said her company is seeing a significant impact from sequestration.

Sequestration has two impacts on solution providers like Dynamic Systems, Norman said.

The first is the budget cuts, which impact sales, Norman said. Just as significant, however, are the furlough days imposed on federal employees, which is causing significant delays in projects often measured in months.

"Furloughs are slowing down the process," she said. "Also, some projects we work on just evaporate. Server purchases and storage purchases have contracts around services with scheduled completion dates. But government staff have to take time off, which delays the work."

Steve Halligan, COO of n2Grate Government Technology Solutions, said that his data center and cloud integration company sees the government leaning toward lower-priced but technically acceptable technologies, rather than investing for the long term. He compared the shift to buying a used car instead of a new one, which may be cheaper in the short run but does not offer the same life span.

"They're willing to accept lower value to get the job done," Halligan said. "With that trend towards solutions that may not have the longevity or the value [the effect] is that the government will have to go back and replace stuff sooner."

Halligan said he has seen the government pushing off contracts toward the end of the year, leaving solution providers to sink or swim under increased time pressure before the end of the year. Halligan said that his company continues to see growth despite increased difficulties in the government IT busy season, though he expects increased volatility going forward.

"It's by staying close to our customers and, really, that listening and planning ahead with them given the high degree of uncertainty. We will always continue to drive longer-term valued solutions, even in the circumstances where they only have enough money for the 'used car.' We need to position for that long-term value for our clients. That's the window where the contractors have to have that long-term view," Halligan said. "It's a marathon with many sprints."


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